The “unprecedented” impact of rising inflation means there is a “real chance” of a recession later this year, the British Chambers of Commerce has warned.
Inflation has hit its highest level in 40 years amid the deepening cost of living crisis.
The rate shot up to a fresh record high of 9 per cent last month, up from 7 per cent in March, following a £ 700 increase to energy bills.
Suren Thiru, head of economics at the British Chamber of Commerce, said: “The scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented and means there is a real chance the UK will be in recession by the third quarter of the year. “
He called for chancellor Rishi Sunak to reverse the rise in National Insurance Contributions and cut VAT on business energy bills to 5 per cent.
It comes after Andrew Bailey, governor of the Bank of England, warned of “apocalyptic” food prices in the months ahead due to the war in Ukraine.
What does the rising rate of inflation mean for you?
The present inflation spike means that the price of everyday items like staple foods – particularly fruit and vegetables – fuel, clothing, shoes and furniture have all climbed over the last year, a development that threatens to hit low-income families hardest at a time when they can least afford it.
My colleague Joe Sommerlad has put together this explainer on how it could affect you:
Chiara Giordano18 May 2022 09:25
‘We cannot protect people completely,’ says Rishi Sunak
Chancellor Rishi Sunak said “we cannot protect people completely” from global problems which contributed to inflation hitting 9 per cent in April but we “are providing significant support where we can, and stand ready to take further action”.
Chiara Giordano18 May 2022 09:10
Think tank defends Bank of England for not raising interest rates sooner
The chief executive of a British think tank has defended the Bank of England after critics argued they should have raised interest rates earlier.
Torsten Bell, the chief executive of the Resolution Foundation, which is dedicated to helping low and middle-income families, told BBC Radio 4’s Today program the Bank of England “were slow in seeing the pace and the scale of this inflation shock that was coming through this year”.
“I think it’s then when they go too far is to say, look, if the Bank of England had raised rates a bit earlier, this wouldn’t be happening right now,” he said.
“That is total and utter nonsense.
“In the end, what the Bank of England is doing with raising interest rates isn’t about avoiding this pain from energy bills.
“It’s about avoiding future pain of inflation becoming embedded as a very tight labor market leads to wage pressures and that could lead to wage pressures that we can’t sustain without a further round of inflation.”
Chiara Giordano18 May 2022 08:57
Inflation rate experienced by poorest households ‘could be closer to 11 per cent’
The Institute for Fiscal Studies economic think tank suggested the inflation rate experienced by the poorest household could be closer to 11 per cent.
“As poorest households spend more of their total budget on gas and electricity, we now see inflation hitting the poorest households harder,” according to analysis by the think tank’s Heidi Karjalainen and Peter Levell said.
“In April, the bottom 10 per cent of the population in terms of income faced a rate of inflation rate of 10.9 per cent, which was three percentage points higher than the inflation rate of the richest 10 per cent.
“Most of this difference comes from the fact that the poorest households spend 11 per cent of their total household budget on gas and electricity, compared to 4 per cent for the richest households.”
Chiara Giordano18 May 2022 08:45
Impact of rising inflation on poorer households higher at 10.2%, says think tank
The impact of rising inflation is being felt harder in poorer households, living standards think tank the Resolution Foundation said.
While CPI inflation hit 9 per cent in April, the think tank estimates that inflation for the poorest households was higher still at 10.2 per cent because they spend a greater share of their budgets on energy bills, which have risen sharply.
Jack Leslie, senior economist at the Resolution Foundation, said: “Inflation reached a 40-year high last month off the back of a sharp rise in energy bills and the highest food price inflation in a decade.
“These recent drivers of inflation mean that lower-income families are facing the most severe cost pressures, with their inflation rate already hitting double digits.
“Inflationary pressures are likely to continue to grow through the year as the effects of higher energy prices continue to work their way through businesses and into consumers’ pockets.
“Nobody knows how long these pressures will last, or how workers will respond via higher wage demands, which is why the Bank faces a tough judgment on the pace and scale of interest rate rises.
“But one thing is certain, the government must provide further targeted support for those lower income families at the sharp end of this crisis.”
Chiara Giordano18 May 2022 08:35
‘Real chance’ of recession later this year
The British Chambers of Commerce said the “unprecedented” impact of rising inflation meant a “real chance” of a recession later this year.
BCC head of economics Suren Thiru called for Rishi Sunak to reverse the rise in National Insurance Contributions and cut VAT on business energy bills to 5 per cent.
He said: “The jump in UK inflation in April is eye-watering and underscores the growing cost-of-living crisis facing households and the damaging squeeze on firms’ ability to invest and operate at full capacity.
“The marked acceleration in the headline rate in April reflected the continued upward pressure on prices from surging energy and commodity costs, as well as the energy price cap rise and the reversal of the VAT reduction for hospitality in the month.
“The scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented and means there is a real chance the UK will be in recession by the third quarter of the year.”
Another interest rate rise in June was “inevitable” but that would do little to address global factors driving inflation up, he said.
Chiara Giordano18 May 2022 08:19
Warning of ‘historic squeeze’ in household finances
The Confederation of British Industry warned of a “historic squeeze” in household finances and a “tough trading environment” for businesses.
The business organization increased pressure on chancellor Rishi Sunak to bring forward extra help to deal with the rising cost of living.
CBI chief economist Rain Newton-Smith said: “Inflation was always likely to hit hard in April given the energy price cap increase.
“Looking ahead, inflation is likely to stay high, with a resulting historic squeeze in households’ incomes and a tough trading environment for businesses. It is critical the government explores options to help people facing real hardship now, and support cashflow for vulnerable firms.
“Stimulating business investment is also crucial, to both plug the near-term gap in growth and to shore up the economy’s potential to withstand future shocks.
“Turning good intentions on a permanent investment deduction into a firm commitment, setting out an infrastructure roadmap and publishing a digital strategy are steps which can be taken without delay.”
Chiara Giordano18 May 2022 08:05
Inflation reaches fresh record high at 9 per cent
Prices rose at their fastest rate in more than 40-years in the 12 months to April as households struggle with a sharp increase in energy bills.
Inflation climbed to a fresh record high of 9 per cent last month, up from 7 per cent in March, following a £ 700 increase to energy bills.
Around three-quarters of the overall surge in inflation came from higher energy bills.
Our economics editor Anna Isaac has the full story:
Chiara Giordano18 May 2022 07:50
Good morning and welcome to The Independent‘s live coverage of the cost of living crisis.
Inflation has hit its highest level in 40 years after shooting to 9 per cent in April, the Office for National Statistics has revealed today.
Stay tuned for rolling updates and reaction.
Chiara Giordano18 May 2022 07:48